The Green Rush Begins: Investors Get In On Pot's Ground Floor

Marijuana is sold for recreational use in Denver. Legalization of pot has set off a "green rush" to invest among venture capitalists.

Brennan Linsley
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Originally published on February 16, 2014 11:44 am

In the past, you could go to jail for selling marijuana. Now, depending upon where you live, you could end up going to the bank.

Medical marijuana is now legal in 20 states, and legislation is pending in 13 others. It's become a $1.5-billion-a-year industry, and it's expected to triple in just a few years. With legal cannabis one of the world's fastest growing market sectors, investors are seeing green.

Everyone from mom-and-pop operations to venture capitalists are rushing to get in on the ground floor, Bruce Barcott tells NPR's Rachel Martin. Barcott is a journalist who covers the cannabis industry in Washington and Colorado, the two states that have legalized recreational marijuana.

Operations starting from ground zero need a lot of start-up cash to lease or buy warehouse space. They also need to purchase ancillary items, such as growing lights and watering systems, as well as security systems required by the states.

Banks are loathe to lend to pot businesses, even though the feds lifted legal restrictions on banks Friday. So enterprising investors are raising the funds that growers and sellers need.

Some of the investors are surprising, says Barcott, who is writing a book on the legalization of marijuana. An early entrant was Privateer Holdings of Seattle, a private equity company started by two Yale business school graduates who had worked in banking in Silicon Valley.

"They came out and spent three years digging into the industry, surviving some lean times," says Barcott. The first three years Privateer Holdings brought in just $7 million of investment. This year they expect to bring in about $50 million.

"Now that things have turned, they're sort of in the catbird seat," he says.

Investors, especially those who are reluctant to be associated with pot's negative stereotypes, have their eyes on the businesses that service the legal marijuana industry. Barcott says they are looking for people like Ross Kirsh, inventor of the Stink Sack, a smell-proof, childproof package for pot. Colorado's law requires that pot be sold in child-resistant containers.

"He pitched his idea to the ArcView investors at a meeting in Seattle back in November," says Barcott, referring to the San Francisco-based cannabis investor network. "He raised probably, I don't know, $100,000-$150,000 and was on a plane to a factory in China that night."

But investing in marijuana is not risk-free. Cannabis remains a controlled substance, along with heroin and LSD. Illegal growing or selling can mean a 40-year prison term.

But last August, in a sign that America's long-running War on Drugs was undergoing a shift, the U.S. Department of Justice issued a memo stating that it would allow Colorado and Washington to implement ballot initiatives legalizing the recreational use of cannabis.

There were, however, strings attached. Essentially, the feds will look the other way as long as the states have a system of "robust controls and procedures on paper; it must also be effective in practice." At the same time, the memo stated that marijuana remains an illegal and dangerous drug.

Barcott believes that the Obama administration sees Washington and Colorado as test cases. Can they regulate the legal marijuana industry, keeping out organized crime and not selling to kids?

"That gives everybody essentially three years to show the rest of the country that it can work," he says. "When the next president comes in, in January 2017, all bets are off. They could end it with the stroke of a pen."

With no guarantees, investing in marijuana is not for everyone. But for those who have the cash to spare, and are willing to risk it, there is potential for huge returns.

As the saying goes, Barcott says, don't bet any money you can't afford to lose. "I wouldn't really invest the house and the farm in this industry," he adds. "But if you've got some extra money to invest, right now it's looking pretty good."

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RACHEL MARTIN, HOST:

This is WEEKEND EDITION from NPR News. I'm Rachel Martin. The U.S. Department of Justice announced Friday that if banks do business with legal marijuana companies, they will not be punished. Possession is still a federal crime, of course, but medical marijuana is legal in 20 different states with legislation pending in 13 others. For venture capitalists, marijuana seems to have hit a kind of sweet spot. It's risky yet full of potential. Some say the so-called green rush, investing in everything from security to insurance, is already worth $1.5 billion a year. Reporter Bruce Barcott is writing a book on investing in marijuana. He's based in Washington state, one of two states to legalize cannabis for recreational use, as a kind of test case. We started by asking him who these investors are.

BRUCE BARCOTT: It's an enormous spectrum of investors. You've got serious money coming in through companies like Privateer Holdings, which is a large investment group. They actually got in really early. They started up about three or four years ago when nobody else was doing this or even looking at the space. And they come from backgrounds in Silicon Valley banking and, you know, the traditional Connecticut investment banking, this sort of thing. They came out and really spent three years digging into the industry, surviving some lean times. But now that things have turned, they're sort of in the catbird's seat, in a way. I mean, I think they brought in about $7 million in investment their first three years. And over the next year, they're looking to bring in about $50 million. And they're an interesting company because they tend to stay half-step away from the actual marijuana leaf.

MARTIN: So, that distance is intentional. They want to keep a certain space between them and the leaf, as it were?

BARCOTT: It is. And, you know, that has to do with federal drug laws and the fact that marijuana is still considered federally a Schedule 1 drug, you know, as bad as heroin and cocaine. And it also has to do a little bit with, you know, the fact that we're in a sort of experimental time right now. The Obama administration has decided to allow these two states to try this pilot project. So, that gives everybody essentially three years to show the rest of the country that it can work. Because once the next president comes in January of 2017, all bets are kind of off. They could end it with the stroke of a pen.

MARTIN: There's so many facets to this industry potentially, though, right? They're not just the big-time investors but there are the growers. There are also people who are trying to spin off retail businesses. And then all the ancillary services - security systems, watering, fertilizing, small businesses. Who's likely to come out on top?

BARCOTT: You know, right now, I think some of the safest money in a way is going into things like security systems. Security companies who can come in and offer you sort of a turnkey operation with video monitoring. And, you know, there are other companies as well that are doing well in the ancillary businesses. One of my favorite success stories is a guy name Ross Kirsh. And Ross is kind of a packaging genius. He has a company called Stink Sack. Actually, it's a bag that will hold your marijuana without the smell getting out. And the smell, it's really pungent stuff. So, Ross had an idea back in November for a resealable childproof package. So, he basically, he pitched his idea to the Ark View investors at a meeting in Seattle back in November - I was there. And he pitched it, he raised probably, I don't know, 100 to 150 thousand dollars, and was on a plane to a factory in China that night. So, there's a lot of opportunity in those little ancillary businesses, and it's happening really fast.

MARTIN: You think people can make money in this industry? You think it's a good bet?

BARCOTT: I think a lot of people are already making a lot of money in this industry. It's a little bit like, you know, what do they say about investing in high-risk opportunities - don't invest any money that you can't really afford to lose. So, you know, I wouldn't invest the house and the farm in this industry. But if you've got some extra money to invest right now, it's looking pretty good.

MARTIN: Bruce Barcott is an environmental reporter who writes about the cannabis industry. Thanks so much, Bruce.